A new year is among us, meaning several new tax provisions as a result of the Tax Cuts and Jobs Act (TCJA) will go into effect this filing season. With virtually all areas of the tax code being impacted, it’s more important than ever to explore tax-planning strategies and ways to minimize your overall liability. Consider these five key tax-planning strategies as you plan for the year ahead:

1. Change in Method of Accounting: TCJA expanded the group of taxpayers who qualify for the cash basis method of accounting and other changes in accounting methods. The Internal Revenue Service (IRS) has increased the gross receipts test to $25 million average gross receipts over the prior three-year period (previously $10 million) and these have been designated as automatic changes.

An abbreviated Form 3115 is required to be filed with your 2018 tax return to make the change, so be sure to work with a tax advisor like those at Doeren Mayhew CPAs and Advisors, to explore whether you qualify. Accounting method changes that qualify for automatic IRS approval under tax reform are:

  • Cash method of accounting
  • Method of accounting for inventories
  • Exception for the uniform capitalization rules
  • Exception for the completed-contract method of accounting

2. Partnerships/LLC Agreements: For 2018 returns, the IRS made numerous changes related to the audit of partnerships and limited liability corporations (LLCs) with new rules governing the liability of each partner. For 2017 and prior years, the partnership designated a Tax Matters Partner (TMP). Beginning in 2018, a Partnership Representative (PR) must be designated.

The PR has the sole authority to act on behalf of the partnership in IRS exams, administrative practice before the IRS and litigation in the court of tax adjustments. Sole authority means the other partners have no right to be notified of an IRS audit, so it is important to carefully select this PR to protect all partners involved (old and new). Be sure to review and amend partnership agreements appropriately once a PR is selected.

3. Qualified Business Income (QBI) Deduction: Individuals who own interests in a sole proprietorship, partnership, LLC or S corporation may now be able to deduct up to 20 percent of their qualified business income. However, the deduction is subject to various rules and limitations at both the company and individual levels.

If you own multiple companies, review wages to make sure this expense is allocated to the proper entity. Additionally, there are aggregation rules that may be applied at the individual level to maximize your QBI deduction. Not all types of businesses qualify for this deduction, so it is important to discuss this with your CPA.

4. Estate and Gift Planning: TCJA increased the federal and estate tax exemption to $22.8 million for married couples ($11.4 million for individuals), and the amount for annual tax-free gifts to $15,000 per recipient. What this means for high-net worth individuals is that they can now gift appreciating assets to heirs from their estate and pay zero federal estate or gift tax up to these thresholds.

Unless Congress makes these changes permanent, the exemption rate will revert to $5 million after 2025, so now is an optimal time to take advantage of this savings opportunity. Be sure to work with a CPA and attorney to maximize these increased exemptions to ensure you’ve also addressed the size of your estate and updated estate and gift documents appropriately.

In conjunction with the estate and gifting, individuals should perform valuations on the gifted assets to establish a value within the exemption limit they’re seeking.

5. Entity Choice: With a new 21-percent corporate tax rate for C corporations, owners of pass-through entities may want to entertain the idea of switching their entity type. Pass-through entities with little distributions to the owners may want to consider switching to a C corporation, but this is strongly dependent on your overall plans for business growth and exit timeline. The new C corporation tax rate is permanent, but the QBI deduction sunsets at the end of 2025.  Any dividend distributions from the C corporation to its shareholders continue to be subject to the qualified dividend rate and net investment income tax (23.8 percent maximum tax on dividends). C corporations may qualify for a 0 percent tax rate upon sale of stock if certain requirements and holding periods are met.

Additionally, the state tax deduction is now limited to $10,000 for individuals. Most state taxes generated by pass-through entities are deducted on the owner’s individual tax return, so the owner may receive little or no deduction. However, C corporations can deduct all state and local taxes. To evaluate your tax impact and entity structure most beneficial to your overall business timeline and goals, consider conducting a multi-year tax projection to compare C corporation tax rates to pass-through entity tax rates.

Doeren Mayhew’s tax advisors stand ready help you navigate this new era of taxes and identify tax-savings strategies appropriate for you and your business. Contact us today for more assistance.